Moody’s Downgrades France

Moody's Catches Up

Moody's downgrade of France's sovereign credit rating can be viewed in all its glorious details here[4]. Keep in mind that Moody's actually had France rated Aaa hitherto and has now altered this to Aaa minus, which is only a minor change. However, the credit outlook rightly remains negative. Some of the reasoning actually reads almost like stand-up comedy, as it sounds a bit as though Moody's had only just noticed things everybody including grand-aunt Emma and her dog know about already:

1.) France's long-term economic growth outlook is negatively affected by multiple structural challenges, including its gradual, sustained loss of competitiveness and the long-standing rigidities of its labor, goods and service markets.

2.) France's fiscal outlook is uncertain as a result of its deteriorating economic prospects, both in the short term due to subdued domestic and external demand, and in the longer term due to the structural rigidities noted above.

Gee, ya think? And this has only been found out just now?

The Zinger

However, the real zinger comes at point three:

3.) The predictability of France's resilience to future euro area shocks is diminishing in view of the rising risks to economic growth, fiscal performance and cost of funding. France's exposure to peripheral Europe through its trade linkages and its banking system is disproportionately large, and its contingent obligations to support other euro area members have been increasing. Moreover, unlike other non-euro area sovereigns that carry similarly high ratings, France does not have access to a national central bank for the financing of its debt in the event of a market disruption.

(emphasis added)

Oh, so 'access to a national central bank' that finances a broke government's debt is a reason to rate said debt more highly? This is utterly misguided and quite dangerous thinking. In fact, we would argue that because such thinking has become quite fashionable lately, the risk embodied in the debt of such countries will ultimately turn out to be far higher, and the eventual financial and economic catastrophe all the more devastating and complete.

We do of course grant that the point about France's disproportionately large exposure to peripheral Europe via its overleveraged banking system has merit, it is a point we are frequently making in these pages ourselves after all. Still, the remark about central bank financing demonstrates how perverted the thinking about government debt and the monetary system has become in modern times.

In times past, the mere mention of central bank financing of government debt would have sent investors running, not walking, from the debt of the country concerned. After all, it means nothing less than the piecemeal theft of their funds, with the possibility of an eventual hyperinflation episode thrown in to spice things up a bit.

Meanwhile, France's bond yields remain at a 270 year low for the moment:

[5]

France's 10 year yield – almost at a 270 year low – click for better resolution.

However, the downgrade is certainly a reminder that the clock is ticking for France as well as the rest of the euro area….tic-toc, tic-toc…